Joe grew up in a financially relaxed household. Money came easily to his parents and when they needed something, it was there. He wasn’t spoiled, just well taken care of. Lucy was just the opposite. Money was scarce. Choices had to be made.
When Joe and Lucy got married, their two very different financial tracks had to merge. Much like Joe and Lucy, all of us have stories about what money was like growing up. As we enter into and manage relationships, merging those financial stories is a crucial element to the relationships’ long-term success. The following points provide guidance on how to do so.
Set expectations around your goals
Funding your children’s schooling is a classic example. For the Joe-like individuals, the answer seems obvious – their parents paid for their schooling, so they feel obligated to do the same. The Lucy answer is starkly different. Whether it’s paying for schooling themselves, or getting some kind of scholarship, they need to have some skin in the game. Whatever the outcome, being proactive with a plan is what matters.
Couples at or near retirement can face equally difficult crossroads. One person may be under the impression they’re going to downsize the home to buy a small condo and spend their time traveling. The other person is completely attached to the home they’ve lived in for 40 years and has no intention of selling it. They want to stay closer to their family and the community relationships they have built. Wow! Sounds like fireworks. Again, plan ahead. Don’t wait until your last day of work to have this discussion. Have it now.
If your goals align, great. If not, tweak them to arrive at a compromise. Goals, plans and circumstances change, so continue to have the conversation. I suggest an annual check in. That way things can evolve naturally and you’re not stuck dealing with a dramatic change 20 years down the road.
Who manages the finances?
It’s completely natural for one person in the relationship to gravitate to the finances. In our example, it’s typically the Lucy types – those that had to make choices about how to spend their money. Over time, that person comes to know their finances like the back of their hand. So what happens if that person is suddenly no longer around? Financial relationships can often live on a teeter totter. One person carries the weight, and the other is left suspended in air. Once the weight is gone, the other person may land pretty hard. Neither person in the relationship wants this, so it’s best to take steps to ensure both people have a baseline understanding of the household finances.
Tip: If you’re working with professionals (CFP®, CPA, etc.), make sure the non-financial person attends all meetings. This allows all parties to increase their plan acumen steadily over time and establish relationships with the professionals.
Be honest with yourself and with your partner about your financial habits. Until recently, I’d never encountered a “secret bank account.” In this case, someone siphoned money into a bank account their spouse was completely unaware of. The intention was to create a pool of money that could continually fund their spending habits. A secret like this is a ticking time bomb. It’s probably one of the primary factors behind the statistic that finance-related issues are the number one cause of divorce. Divorce is much more catastrophic than a secret bank account. Again, it’s best to have full disclosure.
Review your various account statements – bank, investment, credit cards, loans, etc. I know it’s easy to toss them into the shredder with the envelope still sealed, but most of us need to be aware of what we spend, so it’s good to get in the habit of reviewing the statements. Twenty minutes a month is all it should take. The intent is for you to get a rough baseline of where your money is going. Knowledge is power. Understanding the big picture of your spending and savings habits is crucial to your long-term success.
Like Joe and Lucy, we all come from different financial backgrounds. The above discussion topics will help those looking to merge paths as well as those who are on an independent path. Start with setting the expectations and defining goals together. From there, ensure that all parties have a baseline understanding of the financial picture. Move to full disclosure – for most of us, this should be nothing more than getting all of the information on the table. Before you know it, you’ll have a mutually agreed upon plan. Day by day and week by week, you’ll live this plan so you can accomplish all that is important to you.
“Give your kids enough to do anything, but not enough to do nothing.”
With the distractions and commitments kids have these days, it can be hard to find the right time and the best way to teach good money habits. Whether it’s learning simple budgeting skills or the benefits of saving for a long-term goal such as retirement, there is never a better time to start.
Just consider the impact of a kid investing $1,000 at age 12 versus waiting 10 years until after graduating from college. If the funds are to be used in retirement 50 years later and grow at a 8% annual rate, that $1,000 initial investment would grow to $46,901 with 50 years of compounding, versus $21,725 with 40 years to compound. The additional 10-year investment horizon for the 12-year-old leads to a greater than 50% increase in accumulated wealth due to the power of compounding.
Even though the benefits of starting to save and invest early are apparent, it can be difficult for a kid to understand the consequences of waiting to save for a car, house down payment or retirement when these obligations are far in the future. Providing small incentives can often bridge this gap. To teach kids a lifelong lesson, you can create a system of dollar-for-dollar matching of contributions to savings, matching a certain percent or even contributing on their behalf, to incentivize them to participate in school activities like debate club, student government, or choir. As a parent, you will in essence be providing an employer-like match on their contributions.
Once your kid understands the basics of budgeting and why they should spend less than they take in, it’s time to open a savings account. You could help your child open the account online, but going to the bank may give them the best learning experience. A personal banker can help them open the account, and they can learn how to deposit and withdraw money, and then record those transactions.
After opening the savings account you can start offering small incentives, whether it’s contributing on your child’s behalf for good grades in school or paying them for chores around the house.
There’s no minimum age for opening and contributing to a Roth IRA, as long as the minor has earned income from a job that issues a W-2 or 1099-MISC. An allowance for cleaning their room doesn’t count as earned income! For 2016, the most they can contribute to a Roth IRA is either $5,500, or their earned income for the year – whichever is smaller. A parent or guardian needs to be listed on the account until the child is no longer a minor.
If your kid has any amount of earned income during the year, a contribution to a Roth IRA provides tax-free growth and withdrawal in retirement. If your kid earns $600, you can match anything they contribute dollar for dollar, which can help incentivize them to contribute, say, half their earnings. So if they contribute $300, they receive $300 free money from you. The $300 they have left over can then be used on whatever they want!
Roth IRAs for minors can be opened at discount brokerages like Charles Schwab, TD Ameritrade, Vanguard or Fidelity.
If your kid doesn’t have earned income to contribute to a Roth IRA, investing through a taxable brokerage account can provide many of the same benefits. Similar to a minor Roth IRA, a brokerage account needs to have a custodian, such as a parent, listed on the account until they are 18 or older, depending on the state the account is opened in.
This type of account provides more flexibility for withdrawals than a retirement account, and there’s no limit on the amount that can be deposited. These funds can be invested toward goals like saving for a car in the future, a house down payment or even to supplement retirement savings. A similar incentive system would work in this case.
In most cases, you can open this type of custodial account online at discount brokerages like Charles Schwab, TD Ameritrade, Vanguard or Fidelity.
Encouraging good savings habits and educating children on the power of compound interest will result in significant long-term benefits, both personally and financially. More importantly, it will help reduce their chance of encountering a shortfall in savings when it comes to their most important goals as they grow up.
Successful families agree that higher education is essential to the success of future generations, and they also realize that costs are only going to continue to rise. If paying for your children or grandchildren’s tuition is a must (similar to a liability), and you know the exact number of years until they start undergraduate or graduate school (their investment horizon), why not approach saving for their education like you would saving for retirement?
One such way to tackle this goal is through the use of 529 college savings plans. 529s are unique in that there are no income restrictions on contributions, and the contributions can grow and be withdrawn tax-free as long as the distributions go toward qualified expenses (tuition and fees, room and board, books, supplies, and equipment). However, the benefits to your family go much further.
In addition to providing Roth-like advantaged growth and withdrawals, 529 plan assets are also removed from the owner’s estate. This means if a parent or grandparent, who owns a 529 plan with a family member as a beneficiary, were to pass away, the value of the 529 plans would not be included in their gross estate1. And, the total contributions as of 2016 to individual 529 plans can be as high as $235,000 to $452,210 (Pennsylvania) per beneficiary, depending on which state you choose to open the plan. (more…)
At a recent technology event I attended on the Internet of Things, it amazed me how people’s lives will be touched in the future by ‘smart’ systems at home, in the car and on the go. As technology continues to gravitate toward the cloud and social networking, it’s important to look at how your digital property is distributed at the time of your death.
What is digital property?
Digital property includes:
- Computing devices (smartphones, eBook readers, computers, etc.)
- Data storage devices
- Electronically stored information
- User accounts (including email, social networking sites, web blogs, online gaming, etc.)
- Domain names
- Intellectual property rights in digital property
Why does digital property matter?
Digital property is extremely personal and sentimental – this is where many now store pictures, videos and their most prized projects and conversations. Digital property can also be financially valuable – creating worlds or real estate in online games, web presence through blogs and social media, etc.
When privacy laws conflict with helping your family gather pictures and prized possessions from your best and last moments, it can cause enormous stress on your family. (more…)
I recently went to visit a friend in a secure building. He didn’t answer his phone when I called from the front door to let me in, but the building had a keypad entrance system. After a few repeated attempts, I was able to find the correct key code and let myself into the building. When I got to his front door, he was a bit upset that I was able to “hack” into his building. I said it’s pretty easy to figure out PIN codes and passwords because people pick easy to remember numbers, words and patterns. Most of the time you just try the most obvious options first, and you can guess the security code.
In research done by DataGenetics.com in 2012, of the 3.4 million accounts they looked at 11% of people had the PIN code 1234. Over 6% had 1111 and almost 2% had 0000. Given that knowledge trying only 3 PIN codes gives me about a 20% chance of guessing someone’s personal PIN code.
Passwords for computers, emails, and online accounts are not much different. Every year hackers post online usernames and passwords they have harvested. SplashData, a password management company, compiles a list of the most common passwords of the year. In 2013 the top three passwords were 123456, password and 12345678. Other common passwords included phrases like amazon, adobe, password1 and one of my favorites: trustno1.
Since most sites require usernames and passwords for access, and our brains are not designed to hold 50 different complex unreadable passwords, many of us opted to make them easy to remember. Unfortunately, an easy password to remember is an easy password to hack. Below are a couple of things to consider when you create pin codes and passwords to help make them more secure.
- Select PIN codes that are random and have no association to you. For example a PIN code of 3976 is much better than a birth year of say 1960. If I know the year you were born, I would make that a PIN code to try.
- Select a PIN code that is not an easy visual pattern on a keypad. DataGenetics found 2580 was the 22nd most popular PIN code because it is the numbers down the center of the keypad on your phone. The code 1397 is an easy guess as well because it is the corners for the phone keypad going clockwise.
- Avoid using any part of your login or the site name in your password. If your login to amazon.com is firstname.lastname@example.org don’t make your password joe123 or Amazon1.
- Have a different password for every site. I know this can be a big pain, but if a hacker steals your password at one site, they won’t be able to use it at a different site. Imagine if your password was compromised at some site you used three years ago once, and you only use one password. How many sites do you have to update? How much of your data would be at risk (banking, shopping, investment, email)? With a unique password at each site you can reduce your risk.
- Try to use a random password. A password like Fj%9cX44 is much better than F00tballs. While F00tballs has the normal 8 character limit with numbers and upper/lower case letters, hackers are getting smarter and computers are getting faster so simple character substitutions are still risky.
- Use an uncommon phrase. For a while, people suggested using a simple phrase such as “ILikeSchool.” However, as the hacking has improved, many security experts now recommend that you use non-sensical sentences as passwords. A phrase such as “eat_baseball_Yards” or “doughnuts around circles” is more difficult to breach.
- Try using unique logins for various accounts. If possible, I like to have a login that is unique at each site. Also, if it requires an email address, I like to have a few email accounts I can use for different sites. You can easily sign up for multiple Gmail, Hotmail or Yahoo email accounts.
- Use a password management program. If it is really hard to remember all those passwords, there are several programs out there that will securely store your passwords. These programs will store you username and passwords and log you into the website automatically. A quick search for Password Manager in Google or Bing will get you on your way.
As I said above, I don’t think we were meant to remember so many sites, logins and passwords stored in our brains. Writing it down on a piece of paper is just asking for trouble. And storing them in an Excel spreadsheet isn’t any better. There is hope on the horizon. As we work with biometric systems for voice and visual recognition we soon might be able to have our image and voice as our PIN code. We might be able to use a fingerprint and say our name to get in our email. No longer will we need to store all these random phrases, we will only need to remember our name. Oh, and the code to my friend’s building was 2468.
I recently had the good fortune of being featured in this article which appeared on the front page of the Seattle Times Business section, and I want to share it with you.
A.J. and Amy are a young couple burdened by debt who did not have the resources to pay for a financial planner. The Seattle Times reached out to me through my affiliation with the Puget Sound Financial Planning Association and asked if I would build them a plan. After several meetings we were able to identify and build a plan around their short and long term goals. I am thrilled to report that they feel like they are finally in control of their debt and retirement savings. Most importantly, they have developed peace of mind around their finances.
Please keep in mind no two investors are alike, this article referenced above is a specific recommendation based on A.J. and Amy’s personal finances. If you would like to give the gift of financial peace of mind, I am always more than happy to help your friends and family develop their own personal plan.